The body of the second candle completely engulfs the body of the first.
Again, the focus on the candle bodies looks for a real reversal. In this case, the second candle body fully engulfs the first and represents a strong reversal signal.
How do we trade it?
1. In a bull trend, buy above the bullish Engulfing pattern for bullish continuation.
2. In a bear trend, sell below the bearish Engulfing pattern for bearish continuation.
The bullish engulfing pattern is most significant when it occurs after a prolonged downtrend. The stock or index has been selling off sharply. On the day of the bullish engulfing pattern, prices will often start the day by falling. However, strong buying interest comes in and turns the market around.
The bullish engulfing pattern is so named because the open-close range of this candle surrounds or engulfs the open-close range of the previous one. The bullish engulfing represents a reversal of supply and demand. Whereas supply has previously far outstripped demand, now the buyers are more eager than the sellers. Perhaps at a market bottom, this is just short covering at first, but it is the catalyst that ultimately creates a buying stampede.
When analyzing the bullish engulfing pattern, always be aware of its size. The larger the candle, the more significant the possible reversal. A bullish engulfing candle that consumes several of the previous candles speaks of a powerful shift in the market.
The bearish engulfing pattern is the opposite of the bullish engulfing pattern. Like its companion, it is most significant when it occurs after a prolonged, steady trend. On the day of the bearish engulfing pattern, prices often begin by rising. However, strong selling comes in and turns the market around.